RBI turns on the screws

According to the new norms, all lenders must put in place board-approved policies for resolution of stressed assets, including timelines for resolution.

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MG Arun

February 15, 2018

ISSUE DATE: February 26, 2018

UPDATED: February 17, 2018 10:14 IST

Bank NPAs

With non-performing assets (NPAs) in the banking sector ballooning beyond Rs 8 lakh crore, the Reserve Bank of India (RBI) has decided to crack the whip on banks going slow in resolving big cases of bad loans, setting a deadline for resolution of such cases. On February 12, the RBI set a deadline of six months for banks to resolve cases where the NPAs stood at Rs 2,000 crore or more, failing which they will have to compulsorily refer such cases for insolvency proceedings to the National Company Law Tribunal (NCLT).

The central bank has also notified graded resolution plans along with an indicative list of financial difficulty, and directed banks to share data on defaulters with the RBI on a weekly basis. For accounts with exposures of Rs 100 crore toRs 2,000 crore, a timeline for resolution will be announced over a two-year period.

The central bank has withdrawn the existing resolution frameworks and the Joint Lenders' Forum (JLF) has also been discontinued. The JLF is a dedicated group of lender banks that is formed to speed up decisions when an asset (loan) of Rs 100 crore or more becomes an NPA (when a borrower fails to repay the loan). However, it has come in for criticism for its failure to speedily resolve cases of bad loans.

Experts say the RBI's move will significantly increase the reported NPAs of banks in the coming quarters. "In the short term, this will increase the pain for borrowers as well as lenders," says Karthik Srinivasan, group head, financial sector ratings, ICRA, a rating agency. "However, the early identification of stress and resolution will prevent future evergreening of loans and ensure good financial health for the banking system in the long term." Evergreening refers to the practice of giving a fresh loan to repay an old one.

According to the new norms, all lenders must put in place board-approved policies for resolution of stressed assets, including timelines for resolution. "As soon as there is a default in the borrower entity's account with any lender, all lenders-individually or jointly-shall initiate steps to cure the default," the RBI states.

In June last year, the RBI drew up a list of 12 defaulters who owed banks Rs 5,000 crore or more, for insolvency proceedings under the Insolvency and Bankruptcy Code (IBC), 2016. Subsequently, a second list of 28 defaulters was drawn up in August, of which 25 cases are being referred to the NCLT.

According to reports, 451 cases with an exposure of Rs 1.28 lakh crore are pending in the bankruptcy courts. Certain large defaulters such as Bhushan Steel, Essar Steel and ABG Shipyard have already gone under the hammer, and prospective bidders are placing their bids for these firms.

"With 40 large accounts accounting for nearly 33 per cent of the gross NPAs of banks already refereed by the RBI for resolution under the NCLT, lowering the threshold for resolution to Rs 2,000 crore per borrower will enlarge the overall quantum of debt being resolved on a fast-track basis," says Srinivasan.

There are around 50 large borrowers who have banking exposure of Rs 2,000 crore or more and will need resolution by September 1 this year. The total borrowings of these companies stand at Rs 2.46 lakh crore, he adds.

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